Editorial: Red flags in pension draft

Lawmakers: You can do much better for taxpayers

August 25, 2013

A committee of Illinois lawmakers working on pension reform has two things going for it: a wing and a prayer. Lawmakers will need both if they hope to convince taxpayers that their latest plan qualifies as major reform.

Legislators in June created a bipartisan, bicameral committee to find compromise on pension reform. They seem to have found it. It isn't pretty, it's pretty disappointing. Weeks of meetings and countless phone calls among committee members have resulted in a draft proposal that takes a dainty bite at the apple instead of wielding a bear claw:

Committee members say the system's $100 billion unfunded liability would be paid down by 2045. In the first few years, the plan would ease pressure on the state budget. It would delay for four or five years cost-of-living increases in retirement pay — a significant cost saver for taxpayers. That's good. But after the so-called freeze, compounded cost-of-living adjustments would resume.

Unlike House Speaker Michael Madigan's proposal that asks state workers, teachers and university personnel to pay 2 percent more of their incomes toward their retirements and would require younger employees to work longer, this plan has pension users paying 1 percentage point less toward their retirements going forward. And many of them still could retire and collect benefits at age 55, an outdated, expensive option. People in the private sector can only dream of such a sweet deal.

That reluctance to ask more of workers or retirees means the proposal is projected to save taxpayers some $145 billion — if its numerous rosy scenarios come true. That's markedly less than the Madigan proposal's more solid projection of $187 billion in savings.

Bottom line: Instead of looking at broad benefits reform, the committee focused on cost-of-living adjustments — and then figured out a way to shovel more money into the system. How? By diverting in the future the money that is currently being spent to pay off pension bonds:

Money from the state's main checking account that now pays down pension borrowing debts would be redirected once the debts are paid off. The money would be invested and, assuming an 8 percent return, eventually get pumped back into the pension system to reduce the liability.

Any investment adviser will tell you that expecting an 8 percent return is, um, an arguably fanciful projection. Yet the plan would work only if those steady returns materialize.

More about those bonds: The state sold a total of $17.2 billion in bonds to make payments into the pension funds in 2003, 2010 and 2011. The state will be done paying off some of the bonds by 2015. One huge bond sale — the $10 billion borrowed under Rod Blagojevich — will be retired in 2033, freeing up more money to pay down the pension system's liability.

That component — one of the linchpins of the draft proposal — worries us.

First, future money that would be set aside after the bonds are paid off is money that might better be spent elsewhere on education, Medicaid and services for the state's most vulnerable. Or — get this — tax relief. Instead, under this plan it would be spent propping up a system that will perpetuate overly generous benefits that taxpayers simply cannot afford.

In its current form, the plan also doesn't do much until 2041 to ease up pressure on the state's day-to-day operations. From about 2020 to 2038, the state would continue to owe to its pension funds roughly 20 percent of the state's general revenue fund. Under the Madigan plan, the payment schedule would be more manageable.

Feeling all that relief, taxpayers, from the conference committee's proposal?

Neither are we.

The several-years delay of the cost-of-living adjustments would vary by the age of the retiree. After a retiree's freeze period, a COLA equal to half of the consumer price index's growth rate, compounded, would kick in. The committee also is discussing a cap on those automatic pay raises, should inflation spin out of control, and a baseline, should it slip into negative territory. If the compounding strains the system in the future as it has in the past, taxpayers would be at grave risk. Why so?

Led by state Sen. Kwame Raoul, the pension committee has been hyperfocused on meeting the constitutional wording that pensions cannot be diminished or impaired. But without more ambitious reform that would save the pension system more money, the benefits may not be there for retirees at all — or taxpayers may have to pay more.

The committee's draft plan assumes: 1) The state can and will continue to afford to make huge payments annually into the pension system. 2) The legislature will honor that "savings" commitment long after paying off old debt and not spend the money elsewhere. 3) All pension investments will meet an annual return of 8 percent ... for three decades.

Taxpayers would be on the hook if any of those assumptions fail.

The pension committee continues to work out the details of the proposal, which its members hope to unveil the week of Sept. 9. So far, their proposal does not include giving workers the option of a 401(k)-style plan. That idea should be resurrected.

Committee: You've come this far. Keep going. You can do better than this. Give taxpayers and public sector workers a more ambitious plan that will stabilize the system. No wings, no prayers — just basic math.